Something Rotten on Wall Street

Wall Street has been rocked by recent scandals. Enron, WorldCom, Tyco, Adelphia, ImClone, Xerox… The list goes on. All but forgotten in this litany of shame is a scandal that should really upset the individual investor.

In May of this year, Merrill Lynch agreed to pay a $100 million penalty to the state of New York for offering tainted investment advice. The Wall Street Journal predicts the company will face over $1 billion in additional liabilities from civil suits arising over the same allegations.

What Merrill Lynch did wrong was to push risky technology stocks when, according to their own internal communications, they knew the stocks were dogs.

For example, InfoSpace appeared on Merrill's "Favored 15" list throughout much of 2000. At the same time, Merrill's analysts were exchanging emails calling the company a "powder keg" and a "piece of junk." The analysts were right. InfoSpace has plummeted from a split-adjusted high of 130 in 2000 to its current price of 41 cents per share. This is just one example of many. Investors who followed Merrill's recommendations were left holding the bag.

Why on earth would Merrill Lynch do such a thing? The answer is greed. Many of the dot.com darlings hired Merrill Lynch to help underwrite their stock and debt offerings. Merrill was reluctant to issue sell recommendations on these companies for fear they would take their investment banking business elsewhere. This obvious conflict of interest is not unique to Merrill Lynch, but is an inherent flaw in the business model of most full service brokerage houses.

All this should come as no surprise. The full service brokers have been fleecing their customers for years. They do this surreptitiously by layering excessive fees into the securities they sell to individual investors. The most galling part of this is that their clients are often completely unaware of these exorbitant fees.

What to do? Hire a fee-only investment advisor whose interests are aligned with yours. At Shearwater Capital, we only recommend no-load funds with minimal expense ratios. The savings end up where they belong - in your account.

July 1, 2002

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